November 2010 - John Mauldin's Outside the Box

John Mauldin reads hundreds of articles, reports, books, newsletters, etc. and each week he brings one essay from another analyst that should stimulate your thinking. John will not agree with all the essays, and some will make us uncomfortable, but the varied subject matter will offer thoughtful analysis that will challenge our minds to think Outside The Box.

One of my great and increasing pleasures is the Wall Street Journal Weekend Edition. I have grown to really look forward to reading Peggy Noonan, maybe my generation’s most gifted essayist. That would be enough reason to pay the subscription price. To read her wordsmithery (is that a word?) is a sublime joy to this humble journeyman writer.

And the Review section in the WSJ has become a revelation over the last few years. The essays are getting better and better. And the book reviews make me weep, because there are so many great books and I will just not be able to get to them all. But at least I can read the reviews and remind myself of what I should have learned. I spend a few hours every weekend trying to get through the treasure in those pages – on the treadmill, at the coffee shop, or at brunch. I commend it to you. And getting the Journal online here on the ocean is cool. (www.wsj.com)

This week we look over the Pacific pond to China and Japan, in an interview with my friend Vitaliy Katsenelson by David Galland, who is the managing editor of The Casey Report. Vitaliy is the chief investment officer of Investment Management Associates, Inc., and author of Active Value Investing. Profiled in Barron’s in September 2009, Vitaliy, who was born in Murmansk, Russia, and moved to the U.S. in 1991, is an adjunct faculty member at the University of Colorado at Denver’s Graduate School of Business.

Long time readers know that I just don’t get China or Japan. I think both are bubbles, but as Vitaliy notes, many bubbles can outlast the reputations of those predicting their demise. Timing is everything.

Before we get into this week’s outstanding Outside the Box, I want to comment on QE2 and the efforts by some Republican economists to urge legislators to get involved to stop it (see the front page of Monday’s Wall Street Journal). That pushes my comfort zone a little too much.

First, I am not a fan of QE2. Never have been. If it had been my call, I would have punted and told the guys in the Capital that the ball was in their court to get their fiscal house in order, because that is the main source of the problem. But Bernanke and the Fed felt they had to “do something,” to demonstrate they got the seriousness of the situation. If the only policy tool you have left is the hammer of printing money, then the world looks like a nail.

Second, I doubt it works. It might be interesting to see what would happen (theoretically) if they decided to print $3-4 trillion. Now that would have a (probably very negative) impact. But it would show up on the radar screen. I think $600 billion just gets soaked up in bank balance sheets, sloughed off to world emerging markets (that don’t want it) and other hot spots, with some drifting into the stock market. But does it increase real final demand, which is what the Keynesians are so seemingly desperate for? I doubt it. And I just don’t see the transmission mechanism for QE2 to produce new employment of any statistical significance.

My friend and fishing buddy George Friedman travels as much as I do. Yet even when we visit the same place, it's like we're in two different countries. I see a river and think about fishing. George sees a river and explains a geographical reality that's shaped that nation's history. I read the menu at a gourmet restaurant and draw conclusions about my appetite; George observes what kind of shoes the children wear and draws conclusions about the country's future. No joke.

George has developed a way to wield a geopolitical eye in worldly travels - and learn from it. He's currently traveling through key, but less-mentioned, countries of Eastern Europe, on a quest to understand how they see the Russian resurgence and what that means for America's options. He's using his travels to write a series for STRATFOR, a global intelligence company he founded. I've included the first piece of the series below.

What will be the effects of ObamaCare? My friend Lisa Cummings, an expert on employee benefits (she was one of the first employees at Dell and was a senior exec at Wal-Mart), has analyzed the bill; and from what she tells me it appears to be one big pile of unintended consequences and costs. It will be far cheaper for an employer to simply pay the $2,000 fine and pay for the employee to enroll in the government health exchange program, which of course puts more cost on the taxpayer. Behind the curtain of wonderful and laudable objectives is a mountain of regulations and costs. But that is what is coming. I asked Lisa to give me a written report on just the more important changes and costs, and that is your Outside the Box reading today.

Lisa Cummings is an expert global benefits consultant with an emphasis on advising Fortune 500 companies of best practices regarding plan design and legal compliance. She is an ERISA attorney by training and has a rich experience with health and retirement plans in the US and around the world. For more information, you may contact her at lcummings@benefitsconnection.co. Many thanks, Lisa, for taking the time out of your busy schedule.

Michael Lewitt is one of the most provocative writers I know. Her consistently gives me something to chew on with his monthly letter. How he comes up with all those quotes (usually from sources I have never read but should have) amazes me. He has a unique view of the markets as he run Collateralized Debt Obligation funds and really understand the nitty-gritty of the bond and credit markets.